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Designing a retail store network with strategic pricing in a competitive environment

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  • Zhang, Yue

Abstract

This paper presents a location and pricing model for a retailer that sells a homogeneous product to maximize profit in a competitive environment. Specifically, the retailer is to locate a given number of stores and simultaneously to determine the mill price charged at each open store. We assume that mill price and travel cost are two main utility factors considered by customers, and adopt the multinomial logit model to express the flows of customers traveling to stores. The problem is formulated as a mixed integer nonlinear program. We develop a solution framework composed of two phases (location and pricing) to solve the problem. Given a set of open stores, three pricing heuristics are used to determine the optimal price at each open store. Three location heuristics are proposed to find the best set of open stores. Computational experiments suggest us to use a path-following approach provided in the literature for pricing and a tabu search procedure for location. We finally investigate an illustrative example and derive a number of managerial insights regarding location and pricing strategies.

Suggested Citation

  • Zhang, Yue, 2015. "Designing a retail store network with strategic pricing in a competitive environment," International Journal of Production Economics, Elsevier, vol. 159(C), pages 265-273.
    • Handle: RePEc:eee:proeco:v:159:y:2015:i:c:p:265-273
    DOI: 10.1016/j.ijpe.2014.09.013
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    2. Mejía, Gonzalo & Aránguiz, Raúl & Espejo-Díaz, Julián Alberto & Granados-Rivera, Daniela & Mejía-Argueta, Christopher, 2023. "Can street markets be a sustainable strategy to mitigate food insecurity in emerging countries? Insights from a competitive facility location model," Socio-Economic Planning Sciences, Elsevier, vol. 86(C).
    3. Nicolet, Adrien & Atasoy, Bilge, 2024. "A choice-driven service network design and pricing including heterogeneous behaviors," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 191(C).
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    5. Mayadunne, Sanjaya & Johar, Monica & Saydam, Cem, 2018. "Competitive store closing during an economic downturn," International Journal of Production Economics, Elsevier, vol. 199(C), pages 162-178.
    6. Cataldo, Alejandro & Ferrer, Juan–Carlos, 2017. "Optimal pricing and composition of multiple bundles: A two-step approach," European Journal of Operational Research, Elsevier, vol. 259(2), pages 766-777.
    7. Lin, Yun Hui & Tian, Qingyun, 2023. "Facility location and pricing problem: Discretized mill price and exact algorithms," European Journal of Operational Research, Elsevier, vol. 308(2), pages 568-580.

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